The “democratization” of credit has created more opportunities for home ownership, but questions remain whether uninformed consumers pay too much for home loans and whether lenders are competing in historically underserved communities.

Those were views Federal Reserve Chairman Ben Bernanke shared with community development bankers this week at the Opportunity Finance Network’s annual conference in Washington, D.C.

In his prepared remarks, Bernanke said the Fed and community development bankers share a common goal of increasing economic opportunities.

Access to credit is an important part of achieving that goal, the Fed chief said. Advances in information and communication technologies, improved methods of risk assessment, the availability of comprehensive information about applicant’s credit histories, and access to funds from capital markets have led to the democratization of credit, he said.

Lenders have gotten better at pricing risk, and are able to loan money to borrowers who might have previously been turned down for loans, all the while reducing costs through economy of scale, Bernanke said.

Expanded access to mortgage credit “has helped fuel substantial growth in home ownership,” Bernanke acknowledged, with the national rate of home ownership reaching nearly 69 percent this year.

Minority households have made the greatest gains, but the home-ownership rate for blacks and Hispanics remains about two-thirds the rate for whites, Bernanke said. The home-ownership rate in lower-income areas in 2004 was roughly 47 percent, compared with 72 percent in middle-income areas, the Fed chair noted.

The growth in subprime lending — from less than 5 percent of purchase mortgage loans in 1994 to 20 percent in 2005 — raises “some concerns and questions, which are magnified in the case of lower-income borrowers,” Bernanke said.

The Fed chair said those questions include whether lenders effectively compete in historically underserved communities, and whether lower-income borrowers are matched with loans and terms that fit their circumstances.

“Are borrowers aware of the terms and conditions of their loans, and more generally, are consumers sufficiently well-informed to be wary of potentially misleading marketing tactics and to shop effectively among lenders?” Bernanke asked.

A study released this year showed blacks and Hispanics were more likely than whites to take out higher-price loans (see Inman News story). That might be an indication of illegal discrimination, but could also reflect legitimate pricing factors not captured in loan data, such as loan-to-value ratios and borrower credit history, Bernanke said. 

The Fed is “an agency committed to the rigorous enforcement of the fair lending laws,” Bernanke said. To determine if the law has been broken, regulators look at lenders’ business practices. Lenders that offer loan officers incentives to charge some applicants higher interest rates or steer them toward higher-priced loan products are targeted for review, he said.

But equal access to prime loans, competition between lenders, borrower awareness and financial literacy may also be factors in price disparities, Bernanke said. Those issues will be explored in March at the Fed’s Community Affairs Research Conference.

Bernanke cited a recent Federal Reserve study of consumers holding adjustable-rate mortgages as evidence that borrower awareness could be improved, particularly among those with lower incomes and education levels.

Federal banking regulators in September issued new underwriting and disclosure guidelines for nontraditional mortgages. The guidelines, which apply only to federally chartered banks, tell lenders to disclose to borrowers how their monthly payments will increase if they choose to make minimum payments or if interest rates adjust.


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